UNIVERSITY OF THE IMMACULATE CONCEPTION

Bonifacio St., Davao City

MASTERS IN BUSINESS ADMINISTRATION

Financial Management

NINIO BIONG MANIALAG VINCENT RAY BORON, CPA, MBA

Student Professor

Problem 5-14. FUTURE VALUE OF AN ANNUITY. Find the future values of these ordinary
annuities.
Compounding occurs once a year.
a. $500 per year for 8 years at 14%
b. $250 per year for 4 years at 7%
c. $700 per year for 4 years at 0%
d. Rework parts a, b, and c assuming they are annuities due.

Formula:
FVOA = PMT (1+r/n) (t) (n) – 1
r/n

Where:
FVOA = Future value of ordinary annuity
PMT = annuity payments
r = nominal interest rate
n = number of compounding periods per year
t = number of years

Formula:

FVAD = PMT (1+r/n) (t) (n) – 1

r/n x (1+r/n)

Where:
FVAD = future value of annuity due
PMT = annuity payments
r = nominal interest rate
n = number of compounding periods per year
t = number of years

Answers:
a.)
Given:
Annuity payments (PMT) = $500
Interest rate (r) = 14%
Time in years (t) = 8 years
Compounding periods (n) = Annually

Required: Future value (FV) of investment

Solve for future value:

FV = PMT (1+r/n) (t) (n) – 1

r/n

= $500 (1+0.14/1) (8) (1) – 1

0.14/1

= $500 (2.8515864) – 1
0.14

= $500 1.8515864
0.14

FV = $6,616.38

b.)
Annuity payments (PMT) = $250
Interest rate (r) = 7%
Time in years (t) = 4 years
Compounding periods (n) = Annually

Required: Future value (FV) of investment

Solve for the future value:

FV = PMT (1+r/n) (t) (n) – 1

r/n
= $250 (1+0.07/1) (4) (1) – 1
0.07/1

= $250 (1.310796 – 1
0.07

= $250 0.310796
0.07

FV = $1,109.99

c.)

Given:

Annuity payments (PMT) = $700

Interest rate (r) = 0%
Time in years (t) = 4 years
Compounding periods (n) = Annually

Required: Future value (FV) of investment

The future value in this case is simply the total annuity payments since the interest rate is 0%:
FV = PMT x number of payments
= $700 x 4
= $2,800 future value (both for ordinary annuity and due)

d.)
Solve for future value: same given as (a)

FVAD = PMT (1+r/n) (t) (n) – 1

r/n x (1+r/n)

= $500 (1+0.14/1) (8) (1) – 1 (1+0.14/1)

0.14/1

= $500 (2.8525864) – 1
0.14/1 x 1.14

= $500 1.8525864
0.14 x 1.14

= $500 (15.0853464)

= $7,542.67

Solve for future value: same given as (b)

FVAD = PMT (1+r/n) (t) (n) – 1

r/n x (1+r/n)

= $250 (1+0.07/1) (4) (1) – 1 (1+0.07/1)

0.07/1

= $250 1.310796 – 1
0.07 x 1.07

= $250 0.310796
0.07 x 1.07

= $250 (4.7507389)

= $1,187.68

Solve for future value: same given as (c)

FV = PMT x number of payments

= $700 x 4
= $2,800 future value

Problem 5-15. PRESENT VALUE OF AN ANNUITY. Find the present values of these ordinary
annuities. Discounting occurs once a year.
a. $600 per year for 12 years at 8%
b. $300 per year for 6 years at 4%
c. $500 per year for 6 years at 0%
d. Rework parts a, b, and c assuming they are annuities due.

Formula:

PVAD = PMT 1- (1+r/n) - (t) (n) – 1

r/n x (1+r/n)
Where:

PVAD = present value of annuity due

PMT = annuity payments
r = nominal interest rate
n = number of compounding periods per year
t = number of years

PVOA = PMT 1- (1+r/n) - (t) (n)

r/n
Where:
PVOA = present value of ordinary annuity
PMT = annuity payments
r = nominal interest rate
n = number of compounding periods per year
t = number of years

Answers:

a.)
Given:
Annuity payments (PMT) = $600
Interest rate (r) = 8%
Time in years (t) = 12 years
Compounding periods (n) = Annually

Required: Present value (PV) of investment

Solve for present value:

PVOA = PMT 1- (1+r/n) - (t) (n)

r/n

= $600 1- (1+0.08/1) - (12) (1)

0.08/1

= $600 1- (0.3971138)
0.08

= $600 0.6028862
0.08
PVOA = $4,521.65
b.)
Given:
Annuity payments (PMT) = $300
Interest rate (r) = 4%
Time in years (t) = 6 years
Compounding periods (n) = Annually
Required: Present value (PV) of investment

Solve for present value of ordinary annuity:

PVOA = PMT 1- (1+r/n) - (t) (n)

r/n

= $300 1- (1+0.04/1) - (6) (1)

0.04/1

= $300 1- (0.7903145)
0.04

= $600 0.2096855
0.04
PVOA = $1,572.64

c.)

Given:

Annuity payments (PMT) = $500

Interest rate (r) = 0%
Time in years (t) = 6 years
Compounding periods (n) = Annually

Required: Present value (FV) of investment

The present value in this case is simply the total annuity payments since the interest rate is 0%:

PV = PMT x number of payments

= $500 x 6
= $3,000 present value (both for ordinary annuity and due)

d.)
Solve for present value of annuity due: (same given as Part A)

PVAD = PMT 1- (1+r/n) - (t) (n) – 1

r/n x (1+r/n)

= PMT 1- (1+0.08/1) - (12) (1) – 1

0.08/1 x (1+0.08/1)

= $600 1- 0.3971138
0.08 x 1.08
 = $600 0.6028862
0.08 x 1.08

= $600 (8.1389637)
PVAD = $4,883.38

Solve for present value of annuity due: (same given as Part B)

PVAD = PMT 1- (1+r/n) - (t) (n) – 1

r/n x (1+r/n)

= PMT 1- (1+0.04/1) - (6) (1) – 1

0.04/1 x (1+0.04/1)

= $300 1- 0.7903145
0.04 x 1.04

= $300 0.2096855
0.04 x 1.04

= $300 (5.451823)
PVAD = $1,635.55

Solve for present value of annuity due: (same given as Part C)

PV = PMT x number of payments
= $500 x 6
= $3,000 present value of annuity due